How Business Funds Politics

indira-gandhi-ji

In the year 1969, Indira Gandhi split from the Congress party, to form her own Congress party. At that point of time, Gandhi was worried that the corporates would back the parties which opposed her.

Hence, she banned corporate donations to political parties. As Vijay Joshi writes in India’s Long Road—The Search for Prosperity: “One of the watershed moments in the history of corruption was the ban on corporate donations to political parties imposed by Mrs Indira Gandhi in 1969 because she was concerned about the money that would flow into the coffers of the right wing parties that opposed her.”

Of course, this did not stop corporates from donating money to political parties; it only drove them underground, into black money. This ban was lifted in 1985, after the assassination of Gandhi in October 1984. But the black money-non transparent nexus of businesses and politicians has continued since then.

There is very little direct evidence for this other than a few sting operations over the years where politicians have been caught on tape, asking for money. These sting operations have impacted the credibility of politicians across party lines.

Nevertheless, there is some very good research evidence to suggest that businesses do pay politicians before elections. In a paper titled Quid Pro Quo: Builders, Politicians, and Election Finance in India Devesh Kapur and Milan Vaishnav look at cement consumption of builders to show that builders make payments to politicians.

All construction requires cement. When it comes to cement demand, the real estate sector accounts for a major part of the demand in India. When the construction activity carried out by the real estate sector goes up, the demand for cement increases. If the real estate companies are key financiers of politicians, as they are assumed to be, then just before the elections, they will need money to finance the electoral campaign of politicians.

If the real estate companies pay the politicians, it would mean that they will lesser money to carry out their own activities. This would mean a slowdown in construction activity. And a slowdown in construction activity should lead to a fall in cement consumption.

Hence, cement consumption can be tracked to figure out whether real estate companies are actually financing politicians.  Kapur and Vaishnav looked at elections in seventeen Indian states between 1995 and 2010. They found a “contraction in cement consumption (representing a 12 to 15 percent decline) during the month of state assembly elections”. What this clearly tells us is that real estate companies do finance state level politicians, as is commonly inferred.

In fact, there is more evidence of businesses financing the electoral ambitions of politicians through black money. Sandip Sukhtankar looks at this phenomenon in a research paper titled Sweetening the Deal? Political Connections and Sugar Mills in India.

As he writes: “The cane price falls by approximately Rs 20 in politically controlled mills during election years. These drops translate to an economically significant drop in revenues of Rs 60 lakh (US$ 135,000) per election year per mill. Evidence suggests that the profit decline is not due to effects on mill operations, but rather due to appropriation of funds for electoral purposes… From the perspective of farmers, this fall in prices could represent either pure theft by mill chairmen, or indirect campaign contributions.”

Hence, sugar mill owners pay low prices to sugar cane farmers in an election year to be able to funnel more money into electoral campaigns of politicians.

So what is the way out of this? Companies are allowed to take tax credits for corporate donations i.e. they can make a deduction of the amount of political donation while calculating their taxable income. But this hasn’t’ helped. As Joshi writes: “Tax credits do not work because corporates prefer secrecy: they are risk-averse and fear reprisals from parties that win election for donations given to their opponents.”

And so the story continues!

The column originally appeared in the Bangalore Mirror on July 20, 2016

 

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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